Brokers and Research and Trading -- Oh My!

The best part about being a conference chair for Money:Tech is the opportunity to see what's happening on the front lines of the FinTech and Securities businesses. No surprises here: turnover and layoffs are out there, but I also see new opportunities and a thrust towards being smart, thrifty, and creative. More on that in a minute -- first let's talk about the shape of the Industry.

Brokers and Trading are coming to the forefront. I mentioned this in an earlier piece and since then my radar is up big time. With the Merrill/BofA deal and the pending Citigroup/Morgan Stanley arrangement, a return to the rough-and-tumble, sharp-elbows school of trading/brokerage prowess is coming back into vogue (Hello, Bud Fox). The days of your father's order taker may have returned. Clients are looking for advice, insightful commentary, and idea generation, especially on the retail side (institutions have been asking for this since the beginning of time). The name of the game in the brokerage business is maintaining and growing client accounts. Brokers by their nature provide market surveillance and identify return opportunities in line with a client's product and risk profile. Ultimately, If your clients are transacting, your trading floor is happy. So in this case, information = transactions. For the broker, a well-informed client is a prosperous client, and the client is ultimately happy if he is making a return.

If the dogfight is on the brokerage side, this opens up a lot of questions. With sell side research a shell of its former self, especially in comparison to the pre-Spitzer days of coverage, coverage, and more coverage, where are all these brokers going to get information to deliver to their clients? Where is all that differentiated content going to come from? It will not be from the top sell side names that have gone independent and proprietary like Ed Wolfe. No sirree, the gap has been created. Those guys are working for a limited number of buy side clients, and it's so long and thanks for all the fish.

So if you're a retail broker or financial consultant (FC) and your Research department isn't covering enough companies or doing research on emerging product areas like ETFs (Exchange Traded Funds), the game has to shift to third parties or you need do it yourself. That means tools, sites, and idea generators -- both traditional and non-traditional -- are going to be making headway. This, I believe, is where the Internet is entering the picture.

In my travels, I've encountered people from all walks of the financial industry who are using web searches, Google alerts, RSS newsreaders, and web scraping, with varying degrees of success. If they're really adventurous, they are building interfaces using Netvibes, Infongen, iGoogle, and others. But they complain about the time it takes to set up and, especially, maintain these tools. They also note their lack of "financialness," which I interpret as tickerization and the like, for we market denizens live by our tickers -- MSFT, YHOO, GOOG, APPL, BAC, MS. Yet even with all that kvetching, they are finding value. That's why I'm hopeful, better mousetraps aside, that the current need to "Do It Yourself" creates a greater user base and spurs the development of new tools and services.

So when I see something like this, from a company called Connotate, I get a few goosebumps.

This is basically a solution in which you can designate a page or site that needs to be parsed and the results stored as data. Pick and choose the elements, and Connotate's agent-based technology does the manual work of collection, normalizing, monitoring, and aggregating, while you do other tasks. You can then plug the data into your model. Imagine creating your own version of the Challenger, Gray & Christmas report on planned layoffs on a regular, real-time basis. Or, if you so choose, gather the data from VGChartz while pairing it with Amazon sales data to proxy NPD. (Flames await me)

So stay tuned, keep your radar up, and watch the action as we go forward.

Connotate and other interesting tool and service providers will be at Money:Tech, held at NYC's Marriott Marquis Hotel from Feb 4 - 6, 2009. I have some special discount passes for up to 50% percent off, a benefit of being a co-chair. I have a limited number for the first few people who email me.

WSJ's End of Wall Street: Don't Order The Tombstone Just Yet

It's nice to be back after the holidays.

I just watched a series of short videos from the Wall Street Journal's Digital Network. The series is called the "End of Wall Street". It is a short oral history of the past year since the demise of Bear Stearns and the current crisis. It ends with a part called "What Happens Next", yes the biggest question in the world, right next to the last cyclon cylon on Battlestar Galactica. It's a nice piece of journalism even with the mood inducing sad piano.

Follow this up with another WSJ story on Morgan Stanley written by Denis Berman: "Answering Morgan Stanley Riddle" about the possible successors to CEO John Mack. The two top contenders are James Gorman - longtime brokerage guy and Walid Chammah the institutional securities guy. Both of these guys represent what Wall Street has always been about: Sales, Trading, Research and eventually core Investment Banking. I think we have witnessed (first understatement of the year) the end of financial alchemy of complex assets with neatly model risk assumptions passed to investors as securities, those days to some degree, as long as memory holds, are over (whew!). It is one of the questions I will look to ask Bill Janeway and Richard Bookstaber at Money:Tech as they continue their conversation from last year.

In fact a return to fundamental investing (with some help from the Internet, RSS & social media) is upon us. As sell side firms reduce the number of companies they cover, being able to do 'real' research and find proprietary data is an advantage, again.

Back to MS as a barometer for the Street as a whole, the final sentence in the article is the money quote,

"The CEO pick will say a lot about the firm's vision of itself. And whether Wall Street has, at last, died or survived."

If the choice is between a brokerage guy and a markets guy -- that should tell you where we are going - clients and trading.

The good news is that Wall Street never really dies, firms go under or get acquired, but creative destruction always takes place. Just because MS & Goldman Sachs are bank holding companies doesn't mean they are going to stay that way forever - my own hunch is that this is a holding action to provide stability, as we all start to understand the new rules. In the next few months and years, the shackles of stability and emerging competitors will give way to prudent risk seeking and higher profits. It's just human nature.

As long as people seek to do something more than earn a risk free return and have capital to invest, Wall Street survives. If it didn't die after '29, tariffs, and a World War, the Great Panic of 2008 isn't going to kill it.

Rolling Your Own Newsroom

Financial professionals by their very nature are news junkies. I've always enjoyed building my own quick tools to parse information and share it with my co-workers, friends, and family. When I was at Bear Stearns I built a few subject-related iGoogle tabs and shared them with clients or co-workers. I looked at these tools as the poor man's version of Bloomberg, since you could cobble together Yahoo or Google finance data with news feeds to make a focused custom page.

Recently my friends and family were asking me how to keep track of the "Wall Street Crisis." I gave them sites and feeds--but they kept asking me for what I was reading. I spend a considerable amount of time reading, watching, and listening to news all day long. I email, Twitter, and forward links and stories throughout the day. So in essence, I am my own news editor. I enjoy tools like Snackr (thanks Marshall) which allows me to have a real time ticker-like interface for my feeds, and digg the giant social news filter. But one of the key tools I love to use is Google's Reader.

What I like about Google's Reader is the ability to tag items and then turn those tags into feeds for friends or inputs to other applications, like Yahoo Pipes. As I started playing with tags and feeds, I realized that you could create a real useful and simple version of a personal Newsroom. So I built a basic page of headline stories (think Drudgereport) using some Typepad RSS widgets. It took me about 2 hours to get the whole thing functioning through my existing Typepad site. It's basic and gives me 80% of the functionality that I wanted. I created five categories that are important to me and my audience: Technology, Finance & Economics, Politics, Crisis of the Moment, and Weird Wild Stuff. As I read throughout the day, I hand tag all the items that I think are interesting. The feeds automatically update through my tagging and with a small bit of delay they appear on the page.

The key is that all of the items that make it to the page have been reviewed and selected by me. So I am cultivating these stories and sources for my audience instead of having automated keyword tagging populate a feed. The process of reading and tagging is quite scalable (cruising through 1000's of items is pretty painless). Ultimately it allows me to have a place in which my current hot topics are available for my friends. And as a bonus, if my friends use newsreaders they can subscribe to my five topic feeds (I use feedburner to manage the process)

You can check out my mini-news room.

If you are a small organization or group, this is an ideal way to keep track of topics. The cost is low, it is very simple to do and a snap to manage. Google Reader has other features for sharing and annotating links that you could use as well.

Unintended Consequences of Nationalizing Banks

This is not a post for or against the actions of the Treasury. This is a quick look at what may be on the horizon--so that we can all keep our collective eyes open. I invite you to add your own observations and questions in the comments. I'd like to start you off with a couple.

Now that the US government has decided to force nine of the biggest financial institutions to take funds, what does that really mean?

• What impact will there be on the internal risk allocation and compensation programs at these institutions?
• In reference to JP Morgan, Goldman Sachs, and the rest, if the US government is going to limit risk in the short-term as a backstop to the taxpayer's investment--what risks to they choose to limit and why?
• Will some of these firms exit proprietary trading as a whole?
• How will limiting risk affect shareholder expectation of returns?
• Also, if you limit compensation, I don't think it will be just CEOs singing the Paulson Prison Blues. What will attract the entry-level talent that looks to high performance bonuses at the upper levels as a goal?

This also means that the game for Wall Street is about to shift to new players. Make no mistake, a "Neo" Wall Street will arise from this action. The Citadels, SACs and others will fill the risk vacuum left unoccupied by the "old" investment banks. Also, key star players and their groups will migrate or go independent to escape financial and operational collars. And given that a lot of their options/equity compensation is underwater, the long-term incentives may be lacking to keep them in their current seats. The game may be changing, but this is not the end to global finance and capitalism.

My friend Roger Ehrenberg wrote down some of his thoughts on this issue, as well. Check out his two most recent posts:

Bailouts, Nationalism and Diplomacy

A Few Quick Thoughts on the Fed Plan

Games & Markets: Rules Matter

As children (or even now as adults) most of us enjoyed games, whether they are sports, video games, board games, whatever. The defining quality in any of these pastimes is the ability to win in direct competition with others. What makes these games enjoyable is that once the rules are learned or agreed to by participants, skill should become evident as the winner emerges. Sure, luck is an element, but a firm strategy and great tactical moves in a game like Risk make a difference. They also allow a player to exhibit his skill. Even in the case of my own childhood, growing up on the streets of NYC, everyone knew and agreed on which buildings were in foul territory for a game of stickball. The same is true in markets.

Today we have entered a period in American financial history where the rules we lived by for so long have vanished. Markets are supposed to determine value as well as winners and losers. If a Firm employs a bad strategy in the game, it becomes evident in the stock price. Investors are rational even in their irrationality. The reason people pull their assets from the market at this point is simple--a fear of losing further, given uncertainty. This uncertainty, which started in mortgages, has now been exacerbated by the uncertainty and inconsistency of both the Fed and Treasury’s intervention into US markets. The Government’s inconsistent actions of choosing who will live or die in the battles of Bear Run, Lehman’s Crossing and AIGs-burg have given investors agita. Increased violations of a prime market rule: either you have moral hazard or you don’t. There is a reason Star Trek captains had a Prime Directive.

(continue reading)

MONEY:TECH 2009 Up and Running

I am happy to announce that the Money:Tech site is up and running. We've been working on the program for a while. We are looking for people in both the Finance and Technology communities to participate, as attendees and presenters. The last Money:Tech was a success and the next one promises even more.

Money:Tech 2009, will take place February 4-6, 2009 in New York. We are planning a day for workshops and 2 days for the conference itself. We decided to include a workshop day for those out there that wanted to experience and work with some of the latest techniques in gathering, acquiring, and using data from the Internet. More information on workshops will appear in the very near future.

Money:Tech will be loosely organized around these ideas:

• Big Data: Using the Internet to find and harvest new and useful data sets to extract value on companies, industries, sectors


• Visualization/Analytics: Tools, techniques, and applications that make it easier to spot useful patterns, trends, and information


• Research is Everywhere: Who are the new research players and what are they offering?


• Prediction Markets: The pluses and minuses of prediction markets—and how people are using them as part of their investment process


• Collective Intelligence: Drawing inferences, trends, and decisions from the crowd via tools, techniques, web sites, and applications

A few questions for you first:

Do you have an interesting topic, idea, product, or an application of existing tools and techniques that this marketplace needs to know?
Are you building the next Majestic Research or the next Wikinvest?
Are you consuming RSS feeds to power your insight into news and markets?
Are you scraping data from Amazon, Wal-Mart, and others using Kapow, Connotate, Dapper , or a host of other tools, to power you channel checking abilities?
Are you feeding you information needs through iGoogle, Yahoo! Pipes, Google Finance, & Yahoo! Finance?
Are you using Gerson Lehman, Coleman Research, or Primary Insight to supplement your own investment ideas and themes?

If you answered yes to any of these questions or you are intrigued by the prospects, then this is the conference for you. This is for people who like to Think, Speak, & Do.

You can make presentation submissions here

I'll be blogging more about Money:Tech in the near future. Look for upcoming speaker announcements and sessions. You'll be able to following the action here as well as Program Chair Paul Kedrosky's blog

My thanks to the team at O'Reilly for getting this site going. I would also like to thank our Money:Tech Advisory Board, Bill Janeway, Roger Ehrenberg, David Leinweber, Cathleen Rittereiser and of course Tim O'Reilly, for their previous and continuous input.

Tools for the Equity Research Toolbox

When I was a kid, I would always remember commercials for a school called Apex Tech. One of their taglines was "look over the professional tools you get to keep when you finish your training". It's a lot like that today. Google News, along with Yahoo! Pipes are two tools that analysts, traders, and salespeople are discovering and using.

Today the NYTimes pointed to the slow growth of ad revenue as a disappointment to Google on it's news site see - "At Google, Slow Growth in News Site"

In digging through the article I saw this quote that really outlines what Google News is about for people like me, those of us that live in the news.

Google executives defend the news site, saying traffic is not a paramount goal. Google News, they say, helps the company produce better search results and helps users find news sources that they might not know about otherwise.

“For us, news is about search and helping people find information,” said Marissa Mayer, Google’s vice president for search and user experience, who oversees Google News.

This idea of finding "other" news sources is the key.

One of the paramount abilities of a good analyst is to spot trends early and realize their potential impact on a company or industry. What analysts are usually searching for is any hint of weakness or strength in competitive advantage. Sometimes the smallest trends start in the local newspapers. Google News makes locating those topics and stories much easier.

If you pair Google News with the enhanced filtering ability of Yahoo! Pipes, and your favorite feed reader; you can create some worthwhile tools that help your trend seeking abilities.

I am a big fan of some of the ideas behind Microtrends by Mark Penn. Mark is known for spotting the 'soccer moms' impact on the 1996 Clinton campaign. Basically his idea centers around identifying trends that begin when 1% of a population begins to adopt. So if 1% of the US population (3 million people) starts saying something you need to pay attention. The trick as an analyst is to identify topics that may be on their way to that benchmark.

My current interest is in the debate on energy policy as it relates to Oil exploration. What I'm really concerned with is the indirect results and unintended consequences of a change in the current energy policy. Any change from today's policy will cause all companies to respond. This will allow me to set up a group of scenarios which I can watch and be prepared for as a trend develops. A cardinal rule in investment research is to make sure you have as much relevant data as possible. You never want to be blindsided. You can discount information at your own discretion -- but being ignorant is hazardous to your portfolio.

Here is an example I've been working on as part of a wider range of investment ideas on Oil.

My first approach was to set up a search in Google News that highlighted anytime OIL was in the title of a story. You can do that with the 'allintitle' operator and since I wanted US based sources I added the 'location' operator with USA as the source- it looks like this in the Google search window.
https://news.google.com/news?hl=en&ned;=us&q;=allintitle:oil+location:USA&ie;=UTF-8&scoring;=n

To see more useful operators check out the Google Cheat Sheet

There are choices on the page to make this search into an RSS feed. Clicking a link on the page will create a feed url in either RSS 2.0 or Atom. You can then take that feed and do further refining in Yahoo! Pipes. I like to create a broad search from Google News and then apply a layer of filters in Pipes for key terms that I think are important. Once I have configured Pipes to my liking it becomes a feed for my RSS reader. I also created a pipe that looks at the opinion and editorial feeds from certain newspapers. Those in the analyst community will recognize this technique as a kin to using Google alerts. Using RSS is the better mousetrap and it doesn't clog you mailbox.

So what did I find from my pipes that I think is interesting, below are some examples:

175 in House Sign Westmoreland Pledge to Vote to Increase Oil Production
Oil prices put Plastic industry under pressure
Point/Counterpoint: Oil drilling
Oil drilling question looms as election issue
Calls for crack down on oil speculation increase
McCain's policies will not help oil crisis, curb climate change

With two candidates on opposite sides of the issue. Stories and opinion pages are pointing to the key arguments that each side will make. Two of the resident themes are drill now, and oil speculation. Being apolitical here, if there is one thing you can count on -- somewhere along the line-- both of these candidates are going to introduce some type of energy legislation as part of their platforms. The sentiment in the stories, on either side, is just too high for either campaign to ignore as a differentiating issue. With further enhancement, I can track these issues on a regular basis without having to subscribe to every newspaper RSS feed. And as a side benefit to the newspapers involved, to get the full story, I need to go their site - display advertising anyone?

Data on the Web: VGChartz vs. NPD

After writing my first post, Equity Research in the Age of Web 2.0, I received a lot of comments asking really good questions. Most of the questions from readers asked about real world examples. So here's a taste.

In the world of securities research, in general, we talk about consensus sources. These are sources that everyone looks to as an arbiter of what may be happening in a market or industry. In the macro economic world, figures released by the US government, (measures like labor statistics or GDP) are used by the market as a whole to judge where the economy may be headed and where it has been. In certain industries, independent benchmarks are used to define the prospects of an industry or the individual performance of the firms involved. A great example of this is the NPD Group.

The NPD Group, provides pay services that collect information from various retailers and then in turn creates a measure of sales for many product categories. Usually the reports are done on a monthly basis coming out about 2 weeks after the previous months close. I am pretty familiar with their reports and most equity analysts and the market use them as the benchmark. Usually an analyst will write a report in which they predict sales for a particular company in relation to the data provided by NPD. The differences in an equity analyst's view of NPD and his own projection usually leads to an upside or downside surprise in a equity's price, once the NPD reports are published and received by the market.

For the video game sector, NPD produces the benchmark measures for North American game and console sales. Analysts like Michael Pachter of Wedbush Morgan, and Colin Sebastian of Lazard, create, on a regular basis their monthly forecasts of where NPD will come in at. Over the last couple of years a new entrant has entered the picture with different aims from NPD; enter VGChartz. By all accounts this newcomer is causing a headache for NPD and their for pay service.

VGchartz uses a similar methodology as NPD, in trending and forecasting game sales through representative samples.
Here is a excerpt from their About Us page.

"With a growing team of analysts, over ten years of experience and with over twenty years of historical data at our disposal, VG Chartz should be seen as a very powerful prediction tool for industry and casual user alike in looking ahead to the future market and making educated and informed predictions. Using our powerful and proprietary graphing and analysis tools, users can query the extensive sales database and compare the performance of hardware and software sales over time between different formats, genres, titles and manufacturers."

The main difference between NPD & VGChartz is that, VGChartz is a user-based community of video game enthusiasts/experts and NPD is a market research company. Their business models also differ, NPD is a for-pay service and VGChartz looks to be supported mostly by paid advertising. While VGChartz makes their North American data available on a weekly basis along with data from Japan and Europe. NPD is focused on North America, and their data is released monthly.

So if you're an investor interested in this sector or an analyst -- the first question you should ask yourself "is the data from VGChartz good?" My answer is, after looking at and using VGChartz data for the last two years, it's quality. But please in the Age of Web 2.0 form your own opinion.
Here are my reasons:

• The data is weekly as opposed to monthly -- time is a big advantage. (I saw Sony's changing future thanks to VGChartz much quicker than if I'd waited for monthly numbers)


• It is the only place to get as close as possible to worldwide figures on console & game sales.


• The best part of using or working with VGChartz data is that they give you their biases upfront along with a comparison of their numbers against NPD and key analysts like Michael Pachter.


• There is community that has arisen around the numbers; that is willing to have an open exchange about the short comings, and methodologies in VGChartz's multiple forums. You really don't get that with NPD.

It has to drive NPD nuts that a site like VGChartz can create a presence and provide high quality information with a completely different business model. I am sure in the NPD mindset, the thought of an outsider competing with them in this space was completely unanticipated. This was a theme that was echoed at our last Money:Tech. On one hand we had Reuters' Devin Wenig talking to Tim O'Reilly saying he didn't "... see direct competition from consumer media (including Google), arguing that professionals need richer, more curated information sources." And on the other hand, we had Sean Park of Six Paradigm talking about grabbing high quality useful data, as a buy sider, from consumer-oriented services like Yahoo! Finance and Google.

The one thing you can count on is this, smart professionals and investors will always look to high quality data sources that are leading indicators for consensus. If I can find a piece of data, or a source that is a good predictor for what a benchmark will do, I will use it no matter where it comes from. Time and proven results are the final judge. If it happens to be free, so much the better.

Equity Research in the Age of Web 2.0

As a new blogger to Radar and the program co-chair for Money:Tech 2009, I thought I'd introduce myself along with a topic we plan to present at the conference.

After spending many years on Wall Street watching the buy side (investing institutions) and working with the sell side (investment banks); all I can say is that I am excited with what the future holds. The Internet is quickly becoming 'the' vast store house of data, research and commentary that I hoped it would. If you think the Internet is for message board jockeys, blogs for late nights in pajamas, and social media for dating; you are missing point. If you want to add to your company and industry analysis, as well as, your investment process, you need to be an interactive user of the Internet.

So why are we, "the professionals", turning to the Internet? Or more specifically; why are we turning to web sites, blogs and social media for investment research, data and commentary? Well I believe there are a few reasons.

Just about every public company has some type of presence on the Internet. In certain domains, enthusiasts and experts are better informed than most analysts on the actual products, goods or services a company may provide. And they are sharing this knowledge and information with each other in open forums. And if you decide to graduate from lurker to participant the gains are even greater. An informed investment professional, that knows his tickers and sectors, can quickly digest this information into his investment process, just like his phone calls with a Gerson Lehman or Coleman Research expert. This type of high quality information can be found if you know where and how to look.

The emergence of low cost publishing tools, cheap web hosting, and various ways to monetize knowledge is another trend that can put some people on the same level as a CNBC anchor and others on equal footing with a top ranked analyst. Just think of my well known blogger friends like Money:Tech Chair Paul Kedrosky, Barry Ritholtz, Nouriel Roubini, and Roger Ehrenberg. Their collective readership and influence is greater than most sell side analysts.

The economics and dwindling company coverage of most sell side research shops has forced the buy side to scale and employ a do-it-yourself ethic. Your typical buy side analyst needs a place to turn for leads and information, especially when switching sectors and industries. Those places are quickly becoming SeekingAlpha, Wikipedia, LinkedIn and Facebook.

And the biggest reason of all; the established sources of main stream financial news and data are ubiquitous. Everyone on the buy side and sell side has Bloomberg, Reuters, and Dow Jones. And if everyone knows everything at the same time what advantage is that?

So where are we headed?

We are headed to a place where the tools, practices and techniques are starting to emerge. It's a place where anyone with a need and drive can learn to scrape data, do their own automated channel checks, while benchmarking and creating reference data. Have an idea; model it yourself, grab the data from Amazon, benchmark it against Yahoo Finance, and set up your filters in Google Reader for stories or articles related to your themes.

The key is to meld the old with the new. Mixing your custom new found data with established sources from your vendors to provide leading edge mashups that help you complete or flesh out a company's position within the competing forces - think Michael Porter on steroids.

Researching during the age of Web 2.0 doesn't mean blindly following rumors on a web site -- that way leads to madness & ruin. You need to think more like Ben Graham in the early days of modern Wall Street when speculation was the name of the game. Graham was able to find high quality sources of information that others thought to be a waste of time, and he put them to good use.

The same can be said for the tools at your disposal in the Web 2.0 era. Put them to good use and you will be rewarded.

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